Look before you leap

The Hong Kong Stock Exchange (HKEX), where some of Macau’s largest companies are listed, is better at ‘micro level’ whereas the Mainland stock exchange excels at ‘macro’ level, according to the findings of a recent report published by the Hong Kong Stock Exchange.
The publication comes on the heels of Chinese billionaire Wang Jianlin’s move to privatize the Hong Kong-listed Dalian Wanda Commercial Properties and relist it in the Mainland or elsewhere for better valuation.
The report notes that ‘while the valuation differentials at the macro level may exist for a considerable period of time given no significant change in the underlying factors, issuers and investors may still benefit from the opportunities offered by the Hong Kong market arising from such differentials.’
This could include better Initial Public Offering (IPO) pricing in ‘certain industries of market appetite’ which, this year up to May were Consumer Discretionary and Information Technology – which all showed, on average, higher price-earning ratios when compared with their Mainland counterparts – the Shanghai and Shenzhen stock exchanges.
In previous year’s, such as 2014, the higher price-earnings ratio was seen in Hong Kong in the Consumer Stables, Health Care, IT, Utilities and Consumer Discretionary areas, causing the HKEX to note that ‘certain industrial sectors may obtain a higher valuation in Hong Kong than in the Mainland, bearing in mind that the PE (price-earnings ratio) at offer would be rather stock-specific’.
Industry and market
The report further indicates that ‘the “traditional” financial industry tends to have a lower PE (price-earnings ratio) and new economy industries like technology and healthcare, which appeal to investors with high growth prospects, tend to have a higher PE’.
The conclusion of this is that markets ‘with more weighting in new economy industries’ would have higher weighted PE levels and ‘markets with more weighting in the financial industry’ would have lower average PE levels. An example: the Nasdaq market, comprised of roughly 66 per cent in technology and healthcare sectors, is a high-PE market whereas the Hong Kong market, with over 40 per cent financial stocks, is a low-PE market.
The Shanghai stock exchange as of May 31 was weighted 37 per cent in the financial sector – making it a low-PE market whereas the Shenzhen stock exchange – weighted at 10 per cent in the financial sector and 22 per cent in the information technology sector – is a high-PE market – the ‘highest PE among the indices’, according to the report’s analysis based on price and earnings data from Bloomberg.
Retail
A further influence is the amount of speculation in the marketplace. The Hong Kong market in the year 2014-2015 saw ‘over 50 per cent of cash market trading’ contributed by institutional investors of which ‘over 30 percent’ were overseas – whereas it saw only 20 per cent contributed by local retail investors.
This is in contrast to markets in Mainland, where a large amount of retail investors work from ‘a speculative nature’, concentrating on “small-sized and high-risk stocks for higher potential gains’.
The result of this is ‘in the Mainland market, the smaller the company size, the higher the PE ratio’ whereas in Hong Kong ‘company size is not a determinant of stock price valuation.
Advantages for HK
Advantages for those investing through the Hong Kong Stock Exchange are ‘lower priced H shares of AH stocks’, a ‘comprehensive range of investment tools’, ‘higher IPO pricing in certain industrial sectors’, ‘market appetite for stocks in new economy industries’, ‘more flexible IPO and post-listing fund-raising regime’ and an ‘international platform for a listing’ – according to the report. All of Macau’s major integrated resort and casino operators are listed on the Hong Kong Exchange.